US Small Businesses – Why Are Small Businesses Important? (How Many, Statistics & Importance)

How Many Small Businesses Are in the U.S.?

The majority of the population may believe that top ranking corporate companies drive the economy; however, small businesses actually play an important role. Why are small businesses important to the U.S. economy? In this brief overview, we will explain the importance of small businesses in American culture today and take a look at the growing number of new small businesses.

The U.S. Small Business Administration (SBA) provides information to the public regarding how many small businesses there are in the U.S. and how these businesses contribute to the economy. The SBA published a special report, “Small Business Profiles for the States and Territories” in February 2015, providing current data and statistics on small businesses across the country. The report was compiled by economists for the Office of Economic Research of the U.S. Small Business Administration’s Office of Advocacy.

The report breaks down new small businesses into “establishments” and provides information to answer the question of how many businesses are in the U.S. As of 2015, there are 28,443,856 small businesses in the United States. Out of this number, over 5.7 million small businesses hire employees. More of these businesses have survived past the two-year mark, and business bankruptcies have been declining steadily since 2010.

Small businesses with fewer than 20 employees continue to grow. The number of firms with 1 to 19 employees in 2012 was 5.1 million. The top 10 industries for growing small businesses include:

Professional, scientific, and technological
Other services (except public administration)
Retail trade
Construction
Health care and social assistance
Accommodation and food services
Administration and waste management
Wholesale trade
Real estate and rental
Manufacturing

The finance/insurance and transportation/warehousing industries follow very closely on this list. The industries that hire the most employees include health care and social assistance, accommodation and food services, and retail trade.

If you are concerned with how many small businesses in the U.S. actually hire employees, you will be pleased to know that approximately half of the country’s workforce is employed by small businesses. In 2012, there were 56.1 million people working for U.S. small businesses.

In 2012, California had the most small business employees at 6.4 million. Texas came in second with 4.2 million employees. According to the SBA Profile report, the states with the highest numbers of small businesses are:

California: 3,622,304
Texas: 2,412,717
Florida: 2,180,556
New York: 2,057,959
Illinois: 1,169,961
Pennsylvania: 999,591
Georgia: 962,085
Ohio: 926,977
Michigan: 856,682
North Carolina: 833,107

How Do Small Businesses Stimulate the Economy?

The White House refers to small businesses as “the engine of job growth in our economy.” There are several ways small businesses stimulate the country’s economy. These include increasing the growth of GDP and GDI, creating new jobs in the workforce, applying for patents, and requesting small business loans and business credit cards.

Real Gross Domestic Product (GDP) Growth

The SBA reports that the real gross domestic product (GDP) “grew at an annual rate of 5 percent.” This growth explains why small businesses are important to the U.S. economy. The GDP is defined as the value of the nation’s output of goods and services at market prices. The GDP is estimated three different ways: expenditure basis, output basis, and income basis.

This growth in a single quarter, reported in 2014, was the first of its kind since 2003. Experts believe this is a sign of a stronger economy.

The GDP continues to grow at a slow and steady pace. According to the U.S. Department of Commerce’s Bureau of Economic Analysis, the annual rate increased 1.4 percent in the fourth quarter of 2015. The third quarter of 2015 showed a 2 percent increase in GDP.

Another economic indicator, the real gross domestic income (GDI), increased by as much as 0.9 percent in the fourth quarter of 2015. The GDI is used by the Federal Reserve to define the income received from the production of goods and services across the country. The income includes taxes, employees’ earned income, and profits.

Although some economists rely heavier on one indicator than the other, given the increase of both GDP and GDI, this signals that a stronger economy is bouncing back from the recession.

Image source: Bigstock

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Creating Jobs in the Economy

Small businesses employ around half of the private workforce, and the unemployment rate is experiencing a decrease. In October 2013, the unemployment rate was at 7.2 percent. One year later, the rate dropped to 5.8 percent. According to the SBA’s Profile report, 2014 experienced the greatest growth in the job market since 1999.

Of all employers nationally, small businesses make up 99.7 percent, and those with less than 100 employees tend to have the largest percentage of employment. In 2012 alone, over 2.1 million jobs were created due to small businesses. Businesses with less than 100 employees showed the largest share of small business employment.

When a small business creates local jobs, the community feels the impact. At times, these local small businesses are able to provide better pay than larger corporate companies which helps families move further away from the federal poverty level.

The average income for entrepreneurs that chose to incorporate their small business in 2013 was $49,363, and the median rate for people that chose not to incorporate their business was much lower at $22,207.

Minorities are increasingly opening new small businesses each year. Women business owners made up 40 percent of other service industries in 2007 while African Americans made up 15.4 percent of the health care and social assistance industries that same year.

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Why Are Small Businesses Important for Each State?

The following is a list of states and the net new jobs small businesses created in 2012, according to the SBA’s Profile report:

Alabama: 24,890
Alaska: 5,428
Arizona: 39,248
Arkansas: 5,464
California: 271,515
Colorado: 44,285
Connecticut: 21,051
Delaware: 5,038
Washington, D.C.: 8,357
Florida: 226,503
Georgia: 40,580
Hawaii: 5,000
Idaho: 9,295
Illinois: 69,923
Indiana: 45,868
Iowa: 17,768
Kansas: 14,705
Kentucky: 19,712
Louisiana: 24,847
Maine: 5,076
Maryland: 35,334
Massachusetts: 54,120
Michigan: 73,858
Minnesota: 43,832
Mississippi: 6,418
Missouri: 26,881
Montana: 9,123
Nebraska: 13,759
Nevada: 15,168
New Hampshire: 3,520
New Jersey: 61,329
New Mexico: 4,946
New York: 154,264
North Carolina: 44,958
North Dakota: 16,119
Ohio: 84,945
Oklahoma: 29,634
Oregon: 24,604
Pennsylvania: 72,264
Rhode Island: 4,671
South Carolina: 20,465
South Dakota: 7,761
Tennessee: 41,302
Texas: 264,814
Utah: 24,979
Vermont: 1,941
Virginia: 51,597
Washington: 35,180
West Virginia: 10,527
Wisconsin: 27,642
Wyoming: 4,731

The majority of states saw their biggest gains in firm size categories of either 1 to 4 employees or 20 to 99 employees. A few states, like West Virginia, saw their biggest gain in the 200 to 499 category. As many as 18 out of the 50 states’ economies grew faster than the national rate in 2013, with only a few of the states reporting a slower or consistent rate of growth.

Image source: Bigstock

Small Businesses and Bank Lending

The Federal Reserve published a report regarding the creation of the Small Business Lending Fund. The fund was created in 2010 as part of the Small Business Jobs Act to help rebound from the declining available credit to small businesses. Banks that received funding from the Small Business Lending Fund (SBLF) increased their lending by about 10 percent, according to the report.

These loans can help small businesses continue during a rough time as well as expand into larger businesses. After all, every large business started as a small business. Loans to small businesses not only help keep those businesses afloat, but they also stimulate the government.

The American Bankers Association (ABA) reports that banks have increased their business lending to $250 billion. In 2013, 25 million small businesses received loans. Small businesses may also rely on credit cards to receive benefits only available to firms. According to ABA’s report, “The Business of Banking: What Every Policy Maker Needs to Know,” these benefits can include:

Assisting in market expansion
Guaranteeing payments
Helping businesses out of a financial downturn
Enhancing efficiency
Reducing or eliminating employee theft
Avoiding the costs of in-house credit and billing systems

The ABA report states, “small business use of credit cards is a strong contributor to growth, enabling businesses to hire and stimulate the economy.” The loan and credit card process circulates as local banks serve small businesses and the local community benefits.

The Small Business Administration provides loans that help businesses grow and expand, thus stimulating the economy. The SBA loans also guarantee payment and transfer the risk from banks to the administration.

Small businesses that are overlooked by larger banks may qualify for a SBA loan. The loans available include general small business loans 7(a), microloans, real estate and equipment loans, disaster loans, and other loan programs.

The American Spirit of Creativity and Innovation

Entrepreneurship usually features creative people that invent systems, products or services to assist their local community, country or government. Another reason small businesses are important to the economy has to do with securing patents in the United States.

Investors are more likely to look at your invention if it is patented, and these investors can provide your small business with venture capital funding. Patents are not only important to investors either. The United States Patent and Trademark Office states that Intellectual Property (IP) protection affects the nation’s economy by:

Protecting inventors from being copied
Providing a platform for investors
Facilitating vertical market specialization
Supporting an invention’s startup and growth through mergers and acquisitions
Enabling the transfer and trading of technological ideas

According to the U.S. Commerce Department’s report, “Intellectual Property and the U.S. Economy: Industries in Focus,” IP industries account for about 40 million jobs and make up 34.8 percent of the nation’s GDP. This percentage equates to about $5 trillion.

Now that you know why small businesses are important to the U.S. economy from this brief overview, you have at your fingertips reasons as to why you should start a business.

Small businesses can be led by creative entrepreneurs that exhibit the American spirit of invention and innovation. In addition, the number of technological small firms is outgrowing other industries as the world continues to embrace new devices.

Without the small business landscape, these inventions may not have had the chance to come to fruition. Small businesses continue to be the backbone of the U.S. economy.

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